The Dynamic Relationship between Macroeconomic Variables and Emerging Stock Market Indicators: Empirical Evidence from Jordan and Egypt Using the ARDL Model

Abstract

This study examines the dynamic relationship between macroeconomic variables and stock market indices in Egypt and Jordan. Using a descriptive-analytical approach, the study employs quarterly time-series data covering the period from 2006 to 2023. The empirical analysis is conducted using the Autoregressive Distributed Lag (ARDL) cointegration approach and the Error Correction Model (ECM) to investigate both the long-run equilibrium relationship and short-run dynamics. The stock market index is specified as the dependent variable, while gross domestic product (GDP), money supply, interest rate, and inflation rate are included as explanatory variables.

The empirical findings indicate the existence of a long-run equilibrium relationship between macroeconomic variables and stock market indices in both countries. In Jordan, GDP exerts a statistically significant negative effect on the stock market index, whereas money supply has a statistically significant positive effect. By contrast, the effects of the interest rate and inflation rate are statistically insignificant. In Egypt, the interest rate is the only macroeconomic variable that has a statistically significant impact on the stock market index in both the long run and the short run. The results also reveal heterogeneous dynamic responses across the explanatory variables, with some effects materializing after time lags. Furthermore, the ECM estimates confirm the presence of a stable adjustment mechanism, indicating that approximately 36% of short-run disequilibria are corrected in each period in Jordan and about 40% in Egypt. Finally, diagnostic and stability tests confirm that the estimated ARDL models are statistically robust and well specified, supporting the reliability of the empirical findings.